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The Student Loan Moratorium is About to End. Here Are Your Options.
As we approach year-end, millions of students are left in the lurch, wondering what they will do when student loan payments come due in 2021. Fortunately, you have options.
First, let’s break down the student loan moratorium
This moratorium, or extension, was passed on March 27, 2020, and was initially set to last through September 30, 2020, but it was later extended via White House order under the CARES Act. It is the same legislation responsible for stimulus checks, but it also protects your student loan through December 31, 2020.
On March 20, 2020, Secretary of Education Betsy DeVos ordered the office of Federal Student Aid to make the following alterations to all ED federal student loans:
- Suspend loan payments
- Cease collections on loans in default
- Change interest rates to 0% for sixty days
- Refund wages garnished by employers
We discuss the impact of these changes with Chane Steiner, financial expert and CEO of Crediful, who warns that not everyone is exempt from these loans. “Federal loans comprise about 90% of student loans and are eligible for the payment suspension as long as they are owned by the U.S. Education Department,” he says.
“Some federal loans issued under the Federal Family Education Loan program, which was discontinued in 2010, are owned by commercial lenders and others that don’t include the Education Department,” he clarifies. “Borrowers with these loans can’t take advantage of the suspension unless they consolidate their loans into a new loan, which is not always a good option.”
While the reprieve has been a lifesaver for many borrowers, there’s still the matter of payment when loans become unfrozen after the new year.
[ Read: The Best Student Loans of 2020 ]
As President Trump continues to attempt to jumpstart the economy, students are looking for alternatives to make the bill each month. The average student pays just under $400 each month in student loan payments. This amount could easily be restructured and transitioned into more affordable options like income-driven repayment (IDR) plans.
Types of repayment plans
There are four repayment plans — PAYE, REPAYE, IBR and ICR — that borrowers can look into based on their individual needs since they each have varying requirements and terms for eligibility.
“The plans allow you to only pay a small portion of your actual income,” says Lucas Robinson, CTO of Crediful. “The percentage for each plan is 10 percent or above, but those that are higher usually have something else in place to benefit you, like the ICR plan giving two options, and the option that means you pay less is the one that you go with.”
- Revised Pay As You Earn (REPAYE) takes 10% of your discretionary income.
- Pay As You Earn (PAYE) takes 10% of your discretionary income but not more than the standard 10-year payment amount.
- Income-Based Repayment (IBR) takes 10-15% of your discretionary income, depending on whether you’re a new borrower on or after July 1, 2014.
- Income-Contingent Repayment (ICR) takes either 20% of your discretionary income or what you’d pay on a fixed payment plan over 12 years (whichever is less).
The REPAYE is a new spin on the old PAYE plan, and Ethan Taub, CEO of Loanry, says that it could be an attractive option for borrowers. While he says the new REPAYE plan is suitable for any borrower with federal loans, he explains, “The PAYE scheme and the IBR plan are different and must be less than what you would pay on the standard repayment plan.” He notes that there are also specifications regarding income.
“You will be required to part with at least 10% of your income regardless of the plan,” adds Baddeley, “but each plan comes with perks and drawbacks, like the number of years you are required to repay for and not paying more than the 10-year standard plan.”
How to apply for an income-driven repayment plan
First, says Aldrich, “See if you qualify. To apply, go to the Federal Student Aid site. Most people will be eligible, as long as the loans aren’t in default.”
Baddeley adds, “If you speak with your loan servicer, they can provide you with a form for you to be able to apply.” If you’re eligible, you’ll be redirected to the federal student aid site to fill out an online request. Before taking this step, make sure you have access to your most recent tax return or an IRS transcript.
However, your plan does come with an expiration date, warns Aldrich. “Remember, you have to reapply every year so that the amount can be adjusted with your income and family size.”
Other options if you need help repaying your student loans
If an income-driven repayment plan is not the right option for you yet, there are still other forms of support that can help. Robinson suggests deferment of forbearance, saying that “repayment can be suspended temporarily, but you need to have a valid reason.”
[ Read: The Best Emergency Student Loans ]
Nishank Khanna, CFO of Clarify Capital discusses the use of more extended repayment plans that can buy you more time to pay. “To lower monthly payments, borrowers can sign up for an extended repayment plan, which pushes out the duration of loan repayment from 10 to 20 years.”
“Eligibility for extended monthly repayment plans aren’t based on income,” Khanna adds, but he still warns you to proceed with caution. “You’ll want to consider the extra interest you’ll be expected to pay. Pushing out repayment often results in paying significantly more interest, often thousands of dollars extra, over the life of your loan.”
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